In China – The Media is the (Financial) Message

Bloomberg and NY Times have become the China Business Headline

We Westerners all love our freedom of speech and an independent, unfettered 4th estate — but Sign up for the ChinaSolved newsletterthe visa situation for western reporters from the New York Times and Bloomberg still waiting for residency visas to remain in China  has much deeper implications for international managers.  Beijing and the CCP view press freedom as a matter of privacy and sovereignty.  US Vice President Joe Biden  recently registered the Western view that a free press is vital to a healthy economy and society.  But this goes far beyond a clash of cultures.  This time, it’s commercial.

Black & White and Green All Over

Investment runs on information, and the free flow of unbiased facts and verifiable stats has always been a problem subject in China.  Wall Street is willing to cast a blind eye towards China – bankers, brokers and fund managers tend to treat Chinese investments as a special class of assets that don’t have to face the same due diligence scrutiny as other securities.  Furthermore, China has always been bad on press freedom, and some have argued that recent pressures merely put western media on an equal footing with local Chinese reporters.  International investors have traditionally had a strong appetite for Chinese investment, and recent Chinese IPOs have performed well – in spite of incomplete or inaccurate reporting.

It’s got to feel transparent

This time it may be different.  Up until now, the Western media’s relative freedom and access in China have matched the pace of economic openness, at least on the surface. China bulls could argue that the situation has been steadily improving and that China has made great strides in terms of reporting, corporate governance and investor protection.  If the flow of information out of China gets (further) shut off or corrupted, then western banks and brokerages may face compliance issues in their home markets.  Institutional investors rely on OPM – “other people’s money”, and have to satisfy some minimum level of prudence and responsibility.  The ideal standard is 100% transparency into the operation of a company or security – you can see exactly what’s going on.  Up until now, China has offered up a smudged window revealing a limited view of financial activities.  Analysts didn’t have complete clarity about what was happening – but they could credibly claim to have all the pieces they needed to make a judgment about the riskiness of an investment.   If China is seen as bricking up the window into company activity, western analysts will have a hard time claiming that they are making prudent and responsible investments with clients’ funds. (A recent dispute between the US SEC and Chinese authorities over access to financial audits of Chinese firms was resolved – after it threatened to curtail the access of foreign investment.)  American bankers are a pretty brazen lot, but even they have to be able to pretend that it’s a fair game and they are doing their best to follow the rules.

Three Scenarios for China Data Flows:

The NY Times and Bloomberg are in the business of reporting news – but later this month they will be part of the story – and a leading indicator.  There are three possible outcomes:

  1. Status remains Quo.  Visas for both NY Times and Bloomberg are renewed in equal numbers.  Joe Biden’s harmonious approach holds sway, and Beijing is able to privately assert that its message was received while publicly wondering what all the fuss was about.  China and US corporate interests are able to continue to claim that a special relationship is emerging in a positive direction.
  2. Leniency for those who confess, severity for those who resist.  Bloomberg sees its visas restored, while those NYT dogs are sent running home.  Bloomberg, which has financial interests beyond journalism (proprietary terminals, investment data services) is reported to have already taken steps to appease Beijing  , while the NY Times has not.  If BB fares better than the NYT in terms of visas, it can be taken as a sign that Beijing is giving priority to financial interests.  In light of China’s recent announcements about a greater role for the private sector and moves to set up the Shanghai Free Trade Zone   favoritism towards Bloomberg can be seen as a positive sign for business.
  3. Counting Coal Cars.   Worst case scenario – visas denied all around, and information coming out of China is thoroughly managed.  In the pre-reform days, western analysts didn’t have access to reliable China data and resorted to indirect methods to gauge economic activities.  Legend has it that one of the more reliable indicators was produced by an analyst posted on hilltop outside of Beijing who counted the number of coal cars moving into the capital.  Given the deteriorating quality of China’s air, even this crude method would prove unreliable if China decides to completely clamp down on media access.

We usually look to media to report the news – but this time they are the story.  We can gauge China’s direction in 2014 by how they handle these two visa cases.

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